The induction of cytotoxic T lymphocytes (CTL) from precursor T cells requires both antigen and lymphokine signals. Previous work from our laboratory has indicated that three lymphokines are required for the induction of CTL from murine thymocytes; interleukin 2, interferon-gamma (IFN-gamma), and a partially characterized factor referred to as cytotoxic differentiation factor (CDF). While attempting to clone CDF from the human T cell line C10-MJ2, we found that a gene encoding CDF-like activity is identical to the gene encoding the factor known variously as B cell stimulatory factor-2 (BSF-2), IFN-beta 2, and 26-kDa protein. We report here that BSF-2 can induce the differentiation of Ly-2+ CTL from murine thymocytes in the presence of interleukin 2 and that the level of cytotoxicity is augmented by the addition of murine IFN-gamma. Serine esterase, a marker for cytotoxic granules in CTL, was induced only in the presence of BSF-2, and the level of serine esterase activity correlated with the level of serine esterase activity correlated with the level of cytotoxicity. These data suggest that BSF-2 is a differentiation factor for CTL and that it functions in part by inducing proteins required for mediating target cell lysis.